SBC, AT&T Seen as Prototype For Telecom’s Future

Executives at AT&T and SBC say the $16 billion merger of the two phone providers is a signal that consolidation is necessary in the sector. Analysts also see a potentially tricky merger to get past antitrust regulators — as long as it’s deemed suitable for providing customers choices.

The merger, announced Monday,
combines SBC’s local and small business market offerings, such as regional voice and broadband via DSL , with SBC’s stake in wireless provider Cingular. It includes AT&T’s long distance business and established IP-based data
services for government agencies and enterprise companies.

SBC and AT&T executives said the merger is overdue, as telecommunications players offer more managed services to businesses in order to compete with cable providers, which are increasingly offering a similar mix of voice and data along with video.

“If you look, there’s a lot of competition across the telecommunications industry now;
it’s changed a great deal over the last few years,” said Ed Whitacre, SBC chairman and CEO, who is slated to take over as CEO of the merged companies. (David Dorman, AT&T chairman and CEO, will be president of the merged company and hold a seat on the board of directors.)

“There’s wireless, there’s cable companies,
there’s [Competitive Local Exchange Carriers], and I wouldn’t think that any divestitures
would be required,” Whitacre said Monday during a conference call to discuss the merger.

According to research from TNS Telecoms, a telecommunications market information and analysis company, the combined company would control 27 percent of the local phone service consumer market
and 37 percent of the long distance consumer market.

That market strength has some worried about the implications.

Investment advisory firm Legg Mason said in a note the merger could drive rival Baby Bells like Verizon to find merger partners, now that it’s been relegated to second-largest telecom if the deal goes through. A purchase of MCI in order to remain competitive, the analysis goes, would provide Verizon with
an enterprise platform similar to AT&T’s, which is a lucrative part of SBC’s acquisition intentions.

Allan Tumolillo, COO of Probe Financial Associates, also noted that although Verizon could “go it alone” and try to poach AT&T’s customers, such a tactic would place the company at risk. “MCI has been put in play by the SBC-AT&T merger, and if Verizon doesn’t make a play for MCI, someone else will — and that places Verizon at a serious disadvantage.”

Legg Mason also said it expects a drawn-out regulatory review lasting anywhere between 12 and 18 months. In Legg Mason’s view, the SBC/AT&T merger has a good chance of passing muster eventually “but could be subjected to significant divestitures, particularly in
SBC’s region, that complicate matters,” it said in a research note Monday.

Whitacre said with the many state and federal requirements, an extended merger approval process is expected. It is required, though, as the industry has been negatively impacted
by the current state of the telecommunications sector.

“The industry definitely needs to consolidate,” he said. “It’s not been a good industry for investors or capital infrastructure investments in the last few years.”

Whitacre said he doesn’t expect any real problems from the various state and federal regulatory agencies, which will decide whether to approve the merger. He said there are roughly 26-28 state Public Utility Commissions that will review the merger, as well as the Federal Communications Commission (FCC) and the Department of Justice.

But Mark Cooper, director of research at the Consumer
Federation of America (CFA), said the announcement was the final act of the failure of deregulation in the United States.

“Consumers have only two choices — a single cable company that dominates video and high-speed Internet or a regional Bell operating company that dominates local, long distance and wireless telecommunications,” he said in a statement. “Two companies are not enough to provide serious price competition or strong incentives to innovate.”

In a statement Monday, U.S. Senator Daniel Inouye (D-Hawaii), co-chairman of the Senate Commerce, Science, and Transportation Committee, sounded a cautionary note about the deal as well.

“Today’s announcement that SBC intends to recombine with its former parent, AT&T, is not unexpected given the changing nature of the communications marketplace. While I am not ready to applaud or criticize this proposed merger, I do believe it raises a number of questions about the effect on consumers, which must be carefully answered before any approval can be given. Is this combination a necessary evolution of the communications marketplace, or are we permitting unwarranted consolidation that could harm consumers and stifle innovation?”

His statement also said it would be incumbent on regulators at the Department of Justice and the FCC — and perhaps members of Congress – to engage in a careful and exacting review. After all, he added, such a review would ensure that the public interest doesn’t lose the benefits of competition that were created 20 years ago when the Baby Bells were originally spun out of AT&T.

But Daryl Schoolar, a senior analyst at research firm In-stat, said industry consolidation
is overdue in the market, something experts have been expecting for some time now.

“I think it goes back to the late 1990s, when everyone was over-projecting the needs of
these different services and then we all see how bankruptcy companies go out,” he said.
“And then you see companies cycled in and out of bankruptcy and they still remain weakened
players. I’m not saying that about AT&T, but certainly AT&T weakened and continues to get weaker.”

Schoolar said he doesn’t think the SBC and AT&T merger affects the industry as a whole, when one considers the choices delivered by cable and satellite providers.

“What always seems to stop mergers, for the most part, is always the interest of the
consumer and small business, and if you’ve been following AT&T for a while, they’ve
already written off their consumer business,” he said. “The FCC’s really moved its view
of competition in the past several years from being intra-modal to inter-modal; they’re
not looking so much at trying to create competition within wireline as trying to create
competition for services in general.”

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